Chapter 7 bankruptcy, sometimes called straight bankruptcy, is a three- to six-month process that allows you to get rid of most or all of your debts. After you file, a bankruptcy trustee may sell some of your assets to repay your creditors.

To file Chapter 7 bankruptcy, you have to show you don’t have the means to repay your debts over a period of years. If you have or make too much money, a judge may decide that you need to file Chapter 13 bankruptcy instead.

Chapter 13 bankruptcy, also known as wage-earner bankruptcy, is an option for individuals who have a reliable source of income that can be used to repay a portion of their debts. Under this type of bankruptcy, a trustee creates a repayment plan that lays out how you plan to pay down your debt over three to five years.

Why Would You File for Bankruptcy?

People typically file for bankruptcy when they have large amounts of unsecured debt, which is debt that’s not secured by an underlying asset, like a house. The most common types are credit card and medical debt.

They may be out of work for an extended period of time, their wages are being garnished by creditors or they may be worried about the bank foreclosing on their home.

“Bankruptcy should be considered as the last resort for debt,” said Joji Varghese, a bankruptcy counselor at ClearPoint, a nonprofit finance education agency. “For example: Eviction, foreclosure, wage or bank account garnishment.”

Bankruptcy may not be a good option if you’re what’s known as judgment proof — that is, you don’t have any wages for a creditor to garnish or property for them to place a lien on. You’re typically considered judgment proof if your main source of income is some form of public assistance.

“You can’t get blood from a rock — debt collectors can bother you to the ends of the earth,” Rheingold said.

“People who file bankruptcy are people who have some income that might be in danger. Their wages are being garnished, they have a bank account, they have a house. You don’t have enough present income to pay your debts fully and if you don’t take action, you could lose your home or your car.”

You may want to consider someother options instead of bankruptcy, including credit counseling, working out a settlement deal with some or all of your creditors or selling your property to help pay down your debt.

What Happens When You File for Bankruptcy?

Many people consult a bankruptcy attorney before filing and work with one throughout the legal process. Since they understand that you’re probably short on cash, many attorneys will work with you by setting up a payment plan.

What Will Bankruptcy Do to My Credit Score?

A bankruptcy filing gets reported to the creditor bureaus and can stay on your credit report for up to 10 years. It’s a red flag to lenders that you may not be able to repay any money they let you borrow.

“A potential lender who sees that bankruptcy as a part of a consumer’s credit report information will view it as an extremely negative item, worse than delinquencies or accounts in collections,” said Varghese.

But not all financial experts are convinced that bankruptcy is the worst thing you can do for your credit.

“If you’re in a position where you have to contemplate bankruptcy because you have so much debt, bankruptcy is not going to do any more harm to your credit than all of the debts you already have that are accumulating against you,” Rheingold said.

“Bankruptcy may be the first step to help you rebuild your life and your credit.”

Your Turn: Have you considered bankruptcy?

Sarah Kuta is an education reporter in Boulder, Colorado, with a penchant for weekend thrifting, furniture refurbishment and good deals. Find her on Twitter: @sarahkuta.